An Analysis Of Alternative Net Present Value Capital Investment Decision Models
We have found that the disagreement between Returns-to-Assets (RTA) and Returns-to-Equity (RTE) proponents is not confined to agricultural economics. Depending on the course they are taking and the accompanying text, students are likely to learn that there is a "right" way to calculate Net Present Values (NPVs), either by the RTA method or the RTE method. In most cases, only one of the two methods is discussed and illustrated with numerical examples. Less common are texts that compare the two methods, discuss their underlying assumptions, or show how the NPVs from the two methods can be reconciled. The paper is organized as follows. The first section of the main body of the paper provides a comparative overview of the RTA and RTE methods; the second section discusses our textbook survey; the final section offers our conclusions. Appendix A contains a brief history of the theoretical development of discounted cash flow (DCF) concepts. Appendix B contains additional details on defining components of NPV models. Finally, Appendix C is a listing of some additional references.
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- R. K. Perrin, 1972. "Asset Replacement Principles," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 54(1), pages 60-67.
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